Few — if any — small or midsize American businesses are unaffected by the global economy. Your company’s materials, supplies, and services might already be purchased from outside the country.
Your customers might already be global companies located on the other side of the world. And even if they are not, our economy is highly dependent upon foreign countries purchasing and owning U.S. debt, which contributes to interest rate and economic volatility indirectly impacting your business.
According to the Bank of America Merrill Lynch 2013 CFO Outlook survey of CFOs, 62 percent reported buying materials or services from foreign companies, up from 47 percent the year before. With respect to all activities, 73 percent reported buying from, selling into or having actual operations in foreign countries, a significant increase over the 54 percent of the year before.
As a middle market company, global consumer spending growth could fuel your company’s growth. With the widespread adoption of the social network culture in most countries of the world, accessing global customers is fairly easy. The issue to going global is the challenging laws, regulations and financial challenges to delivering goods and services across countries and of course, getting paid.
The 4 key challenges facing middle market companies looking to establish operations in foreign countries are:
- Local Banking: Access to international based capital is very difficult for new operations in foreign countries – capital sources in many countries are local banks, often controlled by the government, focused on local businesses.
- Local Economy: Despite the recovery in the U.S. and the evolving recovery in Europe, local liquidity in countries is still tight and interest rates are often in the double digits.
- Balance Sheet Focus: Having a strong growth story and proven track record may be sufficient for U.S. banks, but generally, foreign local banks are very balance sheet oriented. Only with cash deposits in the bank will the bank consider you for a loan.
- Exchange Risks and Expropriation: Will you be able to recover profits earned from foreign sales and will the exchange rates negatively affect your margins?
Going Global Guidance
Before going global, you should ask and be able to answer 5 key questions:
- What is the “right” organizational structure that you should form to do business overseas? Should you create a foreign subsidiary, a branch office, joint venture, strategic alliance, work through a local distributorship or hire local sales representatives? Often, the answer to this question is dependent on the local tax rates, the presence of a Value Added Tax (VAT) and the form of structure and ownership requirements of the local government.
- What degree of control do you want to maintain over your foreign operations? Local control generally means leaving money in the foreign country. Headquarters control in the U.S. means focusing on paying debts and repatriating cash to the U.S. instead of reinvesting in the growth of the foreign operation.
- Technology integration generally involves a new accounting and finance system that can accommodate foreign operations, currency conversions, labor law variances. You may find yourself in Oracle or SAP territory rather than Quickbooks.
- Back office services are often difficult in foreign countries, even those that pride themselves on being back-office service nations to the U.S. Shared service centers, common accounting rules and qualified accounting professionals are often few and far between in less developed countries, not to mention the “role” that foreign government employees will play in your business.
- Currency restrictions also can play a part in how you will do business in a foreign country as well as export-import laws. Your goods and services may stay in a local warehouse pending foreign government inspection and the payment of “import” taxes. Not good if you are in the seafood exporting business. Goods frequently get “lost” during transport. Additionally, once you are able to sell in the foreign country, some countries have restrictions on the amount of currency that can leave the country.
So with all the challenges and barriers, why go global? The U.S. represents only about 3 percent of the consumers in the world, albeit the wealthiest. Labor costs in the U.S. are among the highest in the world and most everything can be manufactured at a lower cost someplace else. Lastly, many parts of the world are growing 3-4 times faster than the U.S. and represent a huge evolving market for U.S. companies seeking to capture the consumer growth surge outside of the U.S.
The key is to do your research, get qualified and competent advice and stay close to your money.
- Michael Evans is the National Managing Partner for Newport Board Group
- Dennis Day is the Head of Strategic Alliances at TMF Group.
To download the full report referred to above ‘Taking the fear out of international expansion for US companies’ visit www.tmf-group.com/idcreport2014